Crowdfunding Gets Tricky for Amazon

We want our money back: Crowdfunding is changing the way cool projects raise money, but even the wisest crowd demands customer satisfaction. Photo: Library of Congress

The Kickstarter approach to getting money for cool projects has inspired an idealistic devotion to the power of crowdfunding. Thanks to the power of the internet, people with good ideas can get connected to people who want to pay to see those ideas become realities—no middle man needed.

Except when it comes to the internet, there’s always someone in the middle, especially when it comes to handling the money. It’s just easy to forget they’re there. Crowdfunding startup Unglue.it got a harsh reminder when Amazon told the company its payment service would stop processing pledges to get e-books “unglued” from their copyright restrictions. The incident highlights an issue likely to get messier as sites like Kickstarter and even the JOBS Act bring microinvesting mainstream: What happens when people who pay don’t like or don’t get what they think they paid for.

Unglue.it works with copyright holders to determine a fair price to release their works under a Creative Commons license that allows a book to be copied and shared for free. The site then runs Kickstarter-style campaigns to get pledges up to the amount that would get the book released. In a blog post Thursday, Unglue.it says an account manager with Amazon Payments has told the company to void all pending payments. “Amazon has decided against ‘boarding fresh crowdfunding accounts at this time,'” the post says Unglue.it was told.

Unglue.it founder Eric Hellman told Wired that the Amazon account manager went on to explain that Kickstarter was at least one crowdfunding operation whose business Amazon Payments would keep.

Amazon confirmed that it had cut off Unglue.it from its payment services.

“We support a wide variety of businesses, but we have regulatory obligations as a licensed money services business for how we operate,” Amazon spokesman Ty Rogers said in an email. “Unfortunately, Unglue.it’s model is not the same as some other crowdfunding services, and at this time does not allow us to meet those obligations.”

Amazon did not clarify what specific regulatory issues involved. Regardless, it’s easy to see how the world’s biggest e-bookseller might not care for Unglue.it’s aspiration to make books free. Unglue.it did little in its blog post to dispel the idea that its business model could undermine Amazon: “Maybe someday, billions of people will read unglued books and will look back with amazement on the span of years when Amazon dominated the world of e-books.”

Hellman said he didn’t think free e-books were the issue. “When you have a new business model, institutions have trouble putting you in a neat little box,” he said in an email.

According to Amazon, its Flexible Payments Service used by both Unglue.it and Kickstarter exists to provide websites detailed control over how money flows through their businesses. But as crowdfunding platforms become more popular, disputes between payers and payees will no doubt arise. Unlike typical e-commerce transactions, where customers either get the item they purchased or they don’t, crowdfunding opens the door to interpretation. Maybe the independent movie you backed was awful. Or the company making the smart watch you ordered got crushed under the weight of its own popularity and delayed sending out orders.

While lifting copyright restrictions from an e-book seems like a yes-or-no proposition, other cases of unsatisfied crowdfunders could land Amazon and other payment processors in the middle of fights they don’t want to referee. Amazon in particular would probably prefer if would-be crowdfunders took a simpler route to satisfying their urges for cool stuff: Just order it from Amazon.